Audit Evidence Revision Questions and Answers

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QUiz

  1. What is audit evidence?
  2. list the ways of gathering audit evidence.
  3. list qualities of a good sample.

ANSWERS TO THE QUIZ

  1. it refers to the information obtained by the auditor in arriving at the conclusions on which the audit opinion on the financial statements is based. Audit evidence comprises source documents and accounting records underlying the financial statements and corroborating information from other sources.
    1. –          inspection
      1. observation
      1. Inquiry and Confirmation
      1. Computation
      1. analytical procedures.
    1. –          it should be random
      1. it should be representative –         protective

QUESTiON ONE

The auditors operational Standard requires the auditor to obtain ‘relevant and reliable audit evidence sufficient to enable him to draw reasonable conclusions therefrom.

required:

  1. What is audit evidence?
    1. Explain the meaning of the following terms;
      1. relevant audit evidence
      1. reliable audit evidence

c. Explain whether the following types of audit evidence meets the standards of relevancy, reliability and sufficiency as required by the auditor’s operational standards regarding:

  • Written confirmation of a trade debtor circularized at year end
    • Work-in-progress stocks identified during the annual physical stock count
    • Solicitor’s letter confirming pending legal action

QUESTION TWO

The external audit process for the audit of large entities generally involves two or more recognizable stages. One stage involves understanding the business and risk assessment, determining the response to assessed risk, testing of controls and a limited amount of substantive procedures. This stage is sometimes known as the interim audit. Another stage involves further tests of controls and substantive procedures and audit finalization procedures. This stage is sometimes known as the final audit.

Describe and explain the main audit procedures and processes that take place during the interim and final audit of a large entity.

QUESTION THREE

Curdco is a company that runs a chain of fast food restaurants. The company has a centralized operating style and managers of individual restaurants have very limited decision-making powers on day-to-day operational matters. The company’s centralized administration is responsible for the buying of food, the payment of staff, the maintenance and cleaning of restaurants by staff employed by a national agency, and all other matters relating to the running of the business. The company has good internal controls over purchasing. inventory counts are conducted at each restaurant at the year-end. Your firm has recently been appointed as auditor to Curdco.

Required:

  1. List the account headings you would expect to find in Curdco’s schedule of accounts payable and accrued expenditure.
  2. Describe and give reasons for the audit tests you would carry out to obtain audit evidence for Curdco’s accounts payable and accrued expenditure.
  3. Explain the difficulties faced by auditors, and the decisions that auditors have to make, in conducting direct confirmations of accounts payable.

QUESTION FOUR

There are a number of different methods of obtaining audit evidence. methods include:

  • analytical procedures.
  • audit sampling
  • Tests of controls.
  • Detailed testing of transactions and balances.
  • Computer assisted audit techniques (CaaTs)

These methods overlap and may be used for different purposes during an audit of financial statements.

Required:

  1. Explain the advantages and disadvantages of each of the five methods of evidence gathering listed above.
  2. Describe the relationship between the five methods of evidence gathering described above.

QUESTION FIVE

  • Explain the purpose of a management representation letter.
  • a suggested format for the letter of representation has been sent by the auditors to the directors of a client company. The directors have stated that they will not sign the letter of representation this year on the grounds that they believe the additional evidence that it provides is not required by the auditor.

Required:

Discuss the actions the auditor may take as a result of the decision made by the directors not to sign the letter of representation.